The IRS thinks it’s losing half a trillion dollars a year to non-payment of taxes

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  • The IRS has released new data on the amount of taxes still unpaid by Americans and businesses.
  • From 2014 to 2016, the tax gap, which measures taxes owed versus taxes paid, reached nearly $500 billion.
  • This is largely due to people underreporting the amount they owe, including capital gains and small business taxes owed.

The IRS is not getting all the money it is owed, and the situation is getting worse.

According to the latest data from the IRS, the gap between how much filers owe and how much they pay grew to $496 billion for the 2014 to 2016 tax years.

That’s an increase of $58 billion from 2011 to 2013, previous years for which the IRS has released data. The agency also projects the gap widened to an average of $540 billion per year from 2017 to 2019.

“These findings underscore the importance of ensuring fairness in our nation’s tax system,” former IRS Commissioner Chuck Rettig said in a statement. “The increase in tax gap estimates reflects that the IRS needs to do more, both to improve service to taxpayers and to improve tax compliance.”

The data also offers insight into who pays and does not pay their taxes. For example, there is an $18 billion capital gains tax gap, which taxes sales of major assets. The amount you pay on capital gain sales depends on your income; for example, people earning less than $41,675 had a 0% long-term capital gains tax rate in 2022, while those earning $539,901 or more paid 37%. Meanwhile, non-farm homeowner income — which tracks unincorporated small business income — recorded an $80 billion tax gap.

Of course, these are only estimates. Rettig has previously said that “it would not be strange to believe that the actual tax gap could approach and perhaps exceed $1 trillion per year.” The Treasury Department found that the top 1% dodged $163 billion in taxes a year. In total, the Treasury has estimated that the tax gap could reach $600 billion a year, which could cost the government $7 trillion in lost revenue over the next 10 years.

At the same time, the IRS has faced understaffing and a shrinking budget, which has led to an 80% drop in the audit rate for filers earning more than $1 million, according to the White House.

This gap may close soon, however: the recently passed Inflation Reduction Act contains $80 billion in funding for the IRS. About $46 billion of that is intended to bolster law enforcement, according to the Congressional Research Service. The nonpartisan Congressional Budget Office estimates that enforcement spending will bring in $204 billion in revenue over the next decade.

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